As glasses clink with the warmth of whiskey this coming winter, class-action lawsuits are also heating up in the courts.

Plaintiffs have claimed that the making of whiskey is causing the growth of black gunk on structures near the distilleries. Attorneys and risk managers following the “whiskey fungus” cases agreed this will not evolve into the next asbestos or tobacco litigation, but the dispute is an instructive case in emerging environmental risk management.

When spirits are aged, roughly 2 percent of the ethanol escapes through the wood of the barrels. Since antiquity that has been known as “the angels’ share.” Whiskey fungus has also been known for centuries, and has been identified as Baudoinia compniacensis. It is not known to be hazardous to human health, as are other fungus and the mold infamous around New Orleans in the aftermath of Hurricane Katrina. It also is not known to be a threat to the structural integrity of buildings. Rather, it creates a gummy, sooty film on walls and vehicles. It can be scrubbed off with bleach or power washed, but it is tenacious.

The City of Louisville, Ky., published a report in 2012 tracing whiskey fungus complaints in the area to 2006. In June 2012, several homeowners in the city filed class-action suits against five regional distillers. There are several cases, but the lead case is now styled Merrick et al. vs. Diageo.

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The plaintiffs allege that “as a result of the accumulation of whiskey fungus caused by defendants’ operations, plaintiffs and others similarly situated are required to expend an abnormal amount of time and money cleaning surfaces in and around their property, including gutters, siding, fencing and cars; [and that] whiskey fungus and the extreme cleaning methods necessary for its removal cause early weathering of surfaces affected by the fungus.”

At press time, the court was considering Diageo’s motion to dismiss the first amended complaint. In its motion, the company noted that its “allegedly tortious conduct, the emission of ethanol from whiskey aging or other facilities, falls directly within the class of activities regulated by the Clean Air Act, [and that] ethanol emissions are explicitly authorized by state operating permits issued under the CAA.” The defendants further asserted that the fungus is ambient in the environment and therefore not their responsibility.

“Is this an insurable risk, or is this the cost of doing business? If insurers see claims like this continuing, then it becomes likely this type of thing will be considered a normal part of the business and is likely to be excluded from policies.”
— Kenneth Cornell, executive vice president and chief underwriter for Aspen Environmental, part of Aspen Insurance Holdings

The issues being addressed are characteristic of a lot of emerging environmental risks, said Kenneth Cornell, executive vice president and chief underwriter for Aspen Environmental, part of Aspen Insurance Holdings. “So far, the claims, both insurance and legal, are for property damage. There is always the potential for bodily damage, though, because the science is not perfect.”

The insurance implications for the whiskey fungus depend largely on the outcome of the Kentucky cases, and to a lesser extent similar litigation taking place in Scotland. “Is this an insurable risk, or is this the cost of doing business?” Cornell asked. “If insurers see claims like this continuing, then it becomes likely this type of thing will be considered a normal part of the business and is likely to be excluded from policies.”

At that point, Cornell added, “you would get to some interesting risk management decisions. As the distillers have pointed out, they are operating in compliance with their air permits. The question is if they could — or whether they would want to — try to capture or manage ethanol emissions in some way. A lot turns on the class-action suits in Kentucky, but the risk-management part here needs to be studied further in any case.”

Specific to underwriting Cornell noted that the key question is to what extent the distillers have or can exert control over the ethanol emissions from their aging warehouses.

A Centuries-Old Dilemma

David Rieser, special counsel in the environment and regulatory practice at law firm Much Shelist, does not downplay the broader environmental implications of situations like that of the whiskey fungus, but also tries to keep this particular hazard in perspective. “This condition has been known for centuries. If there were a serious health problem, my sense is that it would be well known, too. For example, we have the term ‘mad as a hatter,’ from the use of mercury in treating pelts.”

The challenge with whiskey fungus does not appear to be its serious threat to people or property, but rather its ubiquity and that it tends to be a “chronic problem,” Rieser said. Those conditions also pose a challenge for attorneys and underwriters, he added. “Because of the ubiquity of the fungus in the environment, it is difficult to establish a cause-effect relationship.”

“Now with class-action litigation under way, carriers will be less likely or willing to cover such exposures.”
— Matt Pateidl, vice president of Environmental Risk, Lockton Cos.

Putting fungus and mold issues into perspective, Rieser said that “10 years ago in environmental law, many people were afraid mold would become the next asbestos. That has not really happened. There are health and property damage concerns, but not as serious in most cases as once was feared.”

The risk management lesson here, Rieser said, is that awareness of environmental hazards continues to evolve. “For distillers, their insurers, and their neighbors, the assumption has long been that the angels’ share just evaporates from the casks and that is the end of it. As with many environmental risks, now we are learning that may not be the end of it.”

At least the damage seems to be cosmetic and not structural, said Rieser. “Since the flurry of coverage last year, I have searched through the trade press and legal publications and as far as I have found, whiskey fungus does appear to be very limited in its impact, so far.”

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He stressed “so far,” because one of the fast-growing segments of the spirits sector is craft distilling. Riding the coattails of the national renaissance in craft brewing, artisanal distillers are popping up all over. “I handle lots of permitting,” Rieser said. And while a major corporation might be able to handle litigation regarding whiskey fungus claims, such a burden would be heavy on a small operation, he said.

In any case, Rieser urged distillers to be vigilant. “I certainly would not be out knocking on doors, you don’t want to put ideas in anyone’s head. But, be aware. Look around your area for evidence of the fungus.” He also urged anyone in the field to keep current on the litigation and to stay abreast of coverage in the trade press.

Historical Context

There could be other exposures as well, said Matt Pateidl, vice president of environmental risk at Lockton Cos. “We have seen instances of mold in areas around bakeries, but not around breweries. So far, the links to this type of surface growth is around spirits and baking.”

Taking the historic context back an order of magnitude Pateidl cited a biblical reference (Leviticus 14:43-53) as the first historical reference for a mold remediation plan. He sees a similar pattern in the insurance and legal developments around whiskey fungus as was seen in mold exposures. “At first there was a thought that mold was gold,” said Pateidl. “We started seeing mold exclusions in general liability coverage. Now that whiskey fungus is spawning lawsuits, we may see the same type of exclusions being added.”

Pateidl said the essential question is whether the whiskey fungus is an insurable condition, either for distillers or for their neighbors. But the time may have passed for that contemplation. “Now with class-action litigation under way, carriers will be less likely or willing to cover such exposures.”

He likened the situation to the debates and litigation over odors from feedlots or “confined animal feeding facilities.” There were insurance claims and lawsuits turning on the point of “diminution of value.”

Pateidl also offered a cautionary note: “The insurance industry mostly saw the odor claims as nuisance claims, but there were several multi-million-dollar rulings.”

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Bringing the discussions back around to the key point in the Kentucky class action, Pateidl stressed that there have been no claims that the distillers violated their air permits.

If the litigation continues or even grows, there is always the chance that legislators or regulators may look into fugitive emissions in future permit rules.

“For insureds and their carriers, the first question is whether these emissions can be captured or prevented from migrating,” said Pateidl.

“With class actions under way, carriers are going to be very cautious about issuing policies to cover this situation. They will look at coverage case by case and client by client,” he said. “I’m not saying it would not be covered, but it will be heavily underwritten and closely scrutinized.”

Gregory DL Morris is an independent business journalist based in New York with 25 years’ experience in industry, energy, finance and transportation. He can be reached at [email protected]

Rates are likely to rise for many lines of insurance in 2019, and management liability is no different. In the year ahead, the management liability market will be “stable, but firming,” said Keith Riccio, Vice President, Management Liability and Specialty, Nationwide.

On average, companies can expect to see 10 to 20 percent increases in D&O pricing at renewal, which Riccio said is “significant, but warranted” given prolonged soft market conditions amid growing loss frequency and severity.

“If you compare the D&O market five years ago to today, it’s safe to say anywhere from 20 to 30 percent of premium has been taken out of the market,” Riccio said. D&O losses are reaching record levels thanks largely to the growing number of recent securities class actions.

“Securities class action frequency is at an all-time high for the past three years,” Riccio said. “In 2018, the total was up 200 percent from the 10-year annual average between 1997 and 2017, according to Cornerstone Research’s latest report on securities class action filings.”

That increase is being driven by these nine factors — some of which companies and their insurers have never had to contend with before:

1. Stock Market Volatility Drives Shareholder Litigation

Dramatic fluctuations in stock value tend to give rise to securities class actions by dissatisfied shareholders. In 2018, Wall Street experienced more highs and lows than in any prior year since the recession of 2008. Compounding the issue is that more law firms are capitalizing on the volatility by making securities litigation a core part of their business.

According to Cornerstone’s “Securities Class Action Filings, 2018 Year in Review,” a high number of IPOs in 2017 and 2018 have also contributed to more frequent securities filings. With 134 IPOs, 2018 was above the 2001-2011 average of 99 IPOs per year but remained well below the 1997-2000 average of 403 IPOs per year.

“Stocks offered in an initial public offering are more vulnerable to market volatility,” Riccio said. Going public during a downturn can immediately negatively affect stock value, disappoint investor expectations, and draw a lawsuit.

2. M&A Activity Means Merger-Related Lawsuits

Though the total number of mergers and acquisitions dropped slightly in 2018 over 2017, the trend of consolidation is still strong. Deal value also increased. Global M&A deals made through the first three quarters of 2018 were worth nearly $3.3 trillion, a 39 percent increase over 2017.

“Any time you have a merger or acquisition, there’s a chance you’ll see what’s called a ‘bump-up’ or merger-related lawsuit,” Riccio said. “That inflates the total class action number.”

According to Bloomberg Law, 204 new securities class actions were filed in first half of 2018, and more than 45 percent of them were merger-related.

3. Event-Driven Litigation Presents New Liability Exposure

Companies are increasingly facing liability action over catastrophic events. After the destructive wildfires that wrought havoc across California in 2017, for example, utility companies are facing allegations that their equipment played a role in sparking the flames.

“Energy companies have seen D&O claims arising out of their potential involvement in starting these fires,” Riccio said. “Events like this traditionally would not be perceived as a D&O exposure. It’s a new market dynamic leading to an increase in securities class actions, which is leading to increased losses in a market that hasn’t priced for it.”

4. Boards of Directors Face Accountability for Data Breaches

Securities class actions related to data breaches are growing more common and costly. “We’re starting to see D&O claims arise from data breaches and failure to disclose appropriately to the market information regarding any breach an organization suffered,” Riccio said.

Plaintiffs’ attorneys are quick to file suit on behalf of shareholders based on significant drops in stock value following the disclosure of a breach, and on allegations of misrepresentation in SEC filings regarding the strength of their cyber security prior to the breach.

In a recent high-profile case, Yahoo paid $80 million in September of 2018 to settle a securities class action alleging that the company repeatedly misled investors after four separate data breaches that affected as many as 5 billion accounts. Over the course of 2018, at least nine such actions have been filed against public companies related to a data breach.

5. Allegations of Sexual Harassment Imply Board-Level Mismanagement

Class actions may arise from allegations of sexual harassment against senior executives of a company but will target the entire board of directors over how they handle the situation. Lack of adequate disclosure about the incident or an insufficient response can hurt the company’s stock value and ultimately be fodder for a securities class action.

Plaintiffs can also allege that the company misled investors by not disclosing patterns of misconduct committed by senior executives and failed to acknowledge the negative impact of misconduct on the company’s reputation, legal liability exposure, and overall ability to operate. If company assets were used to make confidential settlements with accusers, then allegations can also include breach of fiduciary duty.

6. Social Media Amplifies Effects of Any Negative News

Social media adds fuel to the flame when it comes to many emerging sources of D&O exposure. The #MeToo movement, for example, has made accusations of sexual harassment front page news. Anger over incidents like data breaches or supposed liability for natural disasters can build and spread faster.

When negative news travels farther and lingers longer, it prolongs the impact of any negative event on a company’s stock price, sparks calls for further investigation, and may attract the attention of attorneys looking for a deep-pocketed target.

“Social media has played a role in giving rise to securities class actions that 10 years ago would not have been filed, simply because it creates an extended period of negative press that companies have a harder time coming out of unscathed,” Riccio said.

7. The Cyan Decision May Mean More Suits and More Defense Costs

In the case of Cyan Inc. v. Beaver County Employees Retirement Fund, the Supreme Court ruled early last year that securities plaintiffs could bring class actions against companies under the Securities Act of 1933 in in state courts.

“Prior to this decision if you had a securities claim in state court and federal court alleging breaches of the ’33 Act, they would be consolidated and move forward only in one jurisdiction. The Cyan decision says that the company cannot remove the state court lawsuit to federal court, even if there’s a parallel or identical federal court action. So that permits the lawsuits in state court and in federal court, with the same sets of allegations and facts, to go on side by side,” Riccio said.

“That’s causing more defense costs to be incurred on behalf of the company that’s being sued, and that’s causing more liability to the D&O marketplace because those defense costs may be picked up by a D&O insurance policy.”

8. Cryptocurrency Is Prone to Corruption, Volatility, and Litigation

Because it’s unregulated and its value swings so wildly, companies investing in cryptocurrencies are very vulnerable to securities litigation.

“The cryptocurrency marketplace has been extremely volatile, which has led to a lot of D&O litigation in that space,” Riccio said. “Any time you have a new unregulated investment vehicle, it’s just ripe for manipulation and corruption, and for people to get taken advantage of.”

Most cryptocurrency purveyors that go public with initial coin offerings — or ICOs — have been hit with a securities class action. Through the first half of 2018, at least 12 ICO-related actions were filed.

9. Mega Verdicts and Settlements Hit D&O Policies

Rising liability verdicts and settlements reaching into the multimillion- and even billion-dollar range also enhance D&O exposure.

“Any asset is fair game when you have a mega liability settlement, and that includes D&O insurance, whether the allegation is related to mismanagement or not. Plaintiffs’ attorneys will look for dollars wherever they can,” Ricco said.

The Right Partner Helps Withstand Volatility

During this time of historic volatility and rapidly emerging exposure, companies absolutely need stability in their D&O carrier.

“We’ve been in the D&O market for more than 10 years and are committed to the space; we’re A+ rated, and we’re stable,” Riccio said. “Even with rising securities class action frequency and increased loss costs, we strive for a price point that is fair to both sides.”

Companies can trust in that statement because, as a mutual company, Nationwide’s fiduciary duty is to its insured members, rather than shareholders. “Our obligation is to our members, so we work hard to truly partner with them,” Riccio said.

That mission includes providing a suite of both primary and excess products for companies of every size in any sector, so a solution exists for every member. A partnership philosophy also extends to the claims approach.

“We handle all claims in-house, and we have a tremendous expertise on that side of the house. Our claims professionals work closely with underwriters in order to adjudicate as quickly as possible. We’re always looking out for members’ best interests,” Riccio said.

As professional liability risk becomes more prominent and more unpredictable, carrier stability and commitment will be critical characteristics as the market adapts.

This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with Nationwide. The editorial staff of Risk & Insurance had no role in its preparation.

Nationwide, a Fortune 100 company, is one of the largest and strongest diversified insurance and financial services organizations in the U.S. and is rated A+ by both A.M. Best and Standard & Poor’s.

Across the workers’ compensation industry, the concept of a worker advocacy model has been around for a while, but has only seen notable adoption in recent years.

Even among those not adopting a formal advocacy approach, mindsets are shifting. Formerly claims-centric programs are becoming worker-centric and it’s a win all around: better outcomes; greater productivity; safer, healthier employees and a stronger bottom line.

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That’s what you’ll see in this month’s issue of Risk & Insurance® when you read the profiles of the four recipients of the 2018 Theodore Roosevelt Workers’ Compensation and Disability Management Award, sponsored by PMA Companies. These four programs put workers front and center in everything they do.

“We were focused on building up a program with an eye on our partner experience. Cost was at the bottom of the list. Doing a better job by our partners was at the top,” said Steve Legg, director of risk management for Starbucks.

Starbucks put claims reporting in the hands of its partners, an exemplary act of trust. The coffee company also put itself in workers’ shoes to identify and remove points of friction.

That led to a call center run by Starbucks’ TPA and a dedicated telephonic case management team so that partners can speak to a live person without the frustration of ‘phone tag’ and unanswered questions.

“We were focused on building up a program with an eye on our partner experience. Cost was at the bottom of the list. Doing a better job by our partners was at the top.” — Steve Legg, director of risk management, Starbucks

Starbucks also implemented direct deposit for lost-time pay, eliminating stressful wait times for injured partners, and allowing them to focus on healing.

For Starbucks, as for all of the 2018 Teddy Award winners, the approach is netting measurable results. With higher partner satisfaction, it has seen a 50 percent decrease in litigation.

Teddy winner Main Line Health (MLH) adopted worker advocacy in a way that goes far beyond claims.

Employees who identify and report safety hazards can take credit for their actions by sending out a formal “Employee Safety Message” to nearly 11,000 mailboxes across the organization.

“The recognition is pretty cool,” said Steve Besack, system director, claims management and workers’ compensation for the health system.

MLH also takes a non-adversarial approach to workers with repeat injuries, seeing them as a resource for identifying areas of improvement.

“When you look at ‘repeat offenders’ in an unconventional way, they’re a great asset to the program, not a liability,” said Mike Miller, manager, workers’ compensation and employee safety for MLH.

Teddy winner Monmouth County, N.J. utilizes high-tech motion capture technology to reduce the chance of placing new hires in jobs that are likely to hurt them.

Monmouth County also adopted numerous wellness initiatives that help workers manage their weight and improve their wellbeing overall.

“You should see the looks on their faces when their cholesterol is down, they’ve lost weight and their blood sugar is better. We’ve had people lose 30 and 40 pounds,” said William McGuane, the county’s manager of benefits and workers’ compensation.

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Do these sound like minor program elements? The math says otherwise: Claims severity has plunged from $5.5 million in 2009 to $1.3 million in 2017.

At the University of Pennsylvania, putting workers first means getting out from behind the desk and finding out what each one of them is tasked with, day in, day out — and looking for ways to make each of those tasks safer.

Regular observations across the sprawling campus have resulted in a phenomenal number of process and equipment changes that seem simple on their own, but in combination have created a substantially safer, healthier campus and improved employee morale.

UPenn’s workers’ comp costs, in the seven-digit figures in 2009, have been virtually cut in half.

Risk & Insurance® is proud to honor the work of these four organizations. We hope their stories inspire other organizations to be true partners with the employees they depend on. &

Michelle Kerr is associate editor of Risk & Insurance. She can be reached at [email protected]

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